A Safe Harbour from the perils of COVID-19?
As COVID-19 continues to have an unprecedented impact on businesses across Australia, it is likely the safe harbour regime will be utilised more than ever before. In this blog post we outline the protections offered by the regime and how it will complement the recently announced temporary insolvency reforms to offer a saving grace in such uncertain times.
A safe harbour applies from the time that directors, who suspect insolvency, start to develop and implement a course of action that is reasonably likely to lead to a better outcome for the corporation than immediate administration or liquidation. It also operates as an exception to the insolvent trading provisions of the Corporations Act 2001 (Cth), however under the Government’s recently announced temporary economic measures, personal liability for insolvency has been waived for six months.
Safe harbour rules require directors to take an active role in the restructure, while acting honestly and genuinely. They must also use up-to-date financial information to assess the likely outcome of a restructure and comply with obligations to pay employee entitlements when they fall due. Meeting all of the company’s taxation reporting obligations, while properly maintaining books and records is also a requirement.
Under safe harbour rules, directors must engage with key stakeholders to develop and implement the restructuring plan. Once it becomes clear that a corporation is not viable, the protection of safe harbour will cease. Protections are not absolute and will require extensive advice and planning as well as consultation with key stakeholders. Their object is to encourage a restructure if it is reasonably likely to lead to a better outcome for the corporation.
Safe harbour does not to protect against other breaches of the Corporations Act and a liquidator may well still be entitled to pursue a creditor for an unfair preference.
The Safe Harbour regime signals a significant change to the corporate insolvency and restructuring landscape in Australia. They seek to maximise the opportunity for preserving a going concern to assist with a corporate restructure in appropriate circumstances. The reforms present a useful step towards dispelling the long-held view that insolvent trading in Australia is focused on punitive outcomes rather than promoting entrepreneurship. Given the uncertainty posed by the rapidly evolving COVID-19 pandemic, the Safe Harbour regime complements the Government’s temporary economic measures to provide a lifeline for Australian businesses.
You can read more commentary on changes to corporate law in response to the evolving COVID-19 situation here.
AAT overturns ATO refusal of $65K luxury car tax claim
In the matter of Skourmallas and Commissioner of Taxation (Taxation) [2019] AATA 5535 the Administrative Appeals Tribunal overturned a decision of Australia Taxation Office after it disallowed a taxpayers claim for input tax credits and decreasing adjustment, resulting in a shortfall of $65,652.
Mr Skourmallas was a motor vehicle dealer who acquired an Audi R8 Coupe as trading stock for a purchase price of $263,750.01. He subsequently claimed GST input tax credits of $19,809 and decreasing adjustment of $45,843.
However, these claims were rejected by the ATO which asserted that he was not carrying on an enterprise but had instead obtained the vehicle for personal use. Mr Skourmallas subsequently applied to the AAT for review of the ATO’s decision.
Before the Tribunal, the ATO relied on the fact that Mr Skourmallas did not operate from a car yard or showroom to support its claim that Mr Skourmallas was not carrying on an enterprise. Further, the ATO asserted that Mr Skourmallas was dishonest and not a credible witness.
The AAT accepted that while Mr Skourmallas could be perceived as belligerent, this did not render him dishonest.
In making a determination as to whether Mr Skourmallas was in fact conducting a business, the court noted that the low kilometres travelled by the car were consistent with it having been obtained as trading stock. Further, it accepted that despite lacking the features of a traditional motor vehicle dealership, Mr Skourmallas’ business model was consistent with the niche market in which he traded.
Ultimately, the AAT ruled that Mr Skourmallas was entitled to the GST input tax credits and luxury car tax decreasing adjustment. However, it did advise that Mr Skourmallas ‘prudently improve’ his record keeping.
